Joan Barnes wanted to meet new moms and that was the inspiration for a place for moms to hang out with other moms.
Dave Young:
Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young.
Before we get into today’s episode, a word from our sponsor, which is… Well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. Here’s one of those.
[Tommy Cool Plumbing, Cooling & Heating Ad]
Dave Young:
Welcome back to the Empire Builders Podcast, Dave Young here with Stephen Semple, and we’re talking about empires. Stephen just whispered the name of the topic into my headphones, and I recognize it, but I don’t recognize it. I don’t have any direct experience with this other than when I was a little kid watching Romper Room, but I don’t think it’s the same thing. The topic is Gymboree, but it sounds like it’s probably related, but I doubt that it is.
Stephen Semple:
Gymboree is not big any longer. There’s a bit of a sad story on that.
Dave Young:
It was a place though, wasn’t it?
Stephen Semple:
Right, it was, and it was huge at one point. It was part of the culture and it was mentioned in movies. It was a really, really big deal at one point.
Dave Young:
Yeah, here’s the issue. Here’s why I don’t remember it. I didn’t grow up in a place. It wasn’t the kind of place it would have a thing. I think I told you I drove 100 miles on our first date to go to Starbucks at a Barnes and Noble.
Stephen Semple:
It wasn’t even a real Starbucks.
Dave Young:
No, it wasn’t even a standalone Starbucks.
Stephen Semple:
Well, to give you an idea how big it got in 2010, Bain bought the company for $1.8 billion, 1.8 billion, and seven years later it went bankrupt.
Dave Young:
Oh, boy. That’s a bigger story than Gymboree if we wanted to go there. But let’s go go with building the empire.
Stephen Semple:
Let’s go with the building of the empire.
Dave Young:
How many buyout people does it take to ruin a company? Not many.
Stephen Semple:
But here’s the thing that’s interesting about this story. We often talk about this whole idea of unleveraged assets, and unleveraged assets becomes a very, very big part of this story. It’s very, very cool.
The business was founded by Joan Barnes in 1976. She grew up outside of Chicago, studied dance and English in college, and got married. They moved to the West Coast. She’s this new mom in this new area looking for connections, and she started to host these get togethers with parents and kids at a local Jewish center. Joe Barnes, her husband, was a journalist. This journalist background becomes important a little bit later. As I mentioned, they grew up outside of Chicago and they picked up and moved and landed in San Francisco, where he got a job. And then they moved out to a suburb in 1973.
She was basically lonely. 1973 was actually one of the lowest birth years in a long time, and so she was looking for people who had kids. Both of their families, both her family and his family, were back on the East Coast, and so she wanted to meet other moms. At this point, this whole idea of play groups didn’t exist. It was this new idea. And so she was in this dance company and had a friend in the company, and this friend had been offered a job to run activities for kids in a local community center. She was nervous to do it. Joan suggests, “Why don’t we share this idea?”
And so it was a preschool after school programs. Joan went to a local YMCA that had this gym that they had set up called Kindergym, and she went and she checked it out. Everything there was this full-sized gym equipment and they modified how it was being used, but it was like full sized trampolines and full sized this and full sized that. As soon as she saw it, she had this vision of what it could be.
Dave Young:
I mean, there’s nothing funnier than a five-year-old on the uneven bars.
Stephen Semple:
Yeah, there you go.
Dave Young:
I’m just saying.
But go ahead.
Stephen Semple:
So she had this vision: scale down the equipment, make it colorful, add music, lively teacher. This could be something really special, and maybe this is what could be done at the Jewish center. Now, some of the things were available it turns out she found out for special needs kids and the rest needed to be built, so she started to do that.
But here’s the other thing. She knew how to get press to promote this. She had learned from her husband. She created a story of what the plan would be like, and she managed to get this big full page feature article in the local newspaper. In 1976, they opened this Kindergym in the JCC, and it’s immediately this huge success. It’s oversold. They hire preschool teachers to run the program. The goal was for the kids to have fun and let moms connect with other moms. That was the goal.
It’s so successful they open another one in a center close by, and at this point they get approached by an entrepreneur, Max Shapiro, to put up some money. Basically the idea was, let’s do more of these. I’ll put up the money, you run them. Max Shapiro had run a basketball camp with Rick Barry, who was an ex-basketball player, that he had sold. He had some money kicking around to do this. They went down to San Montejo and they opened a Kindergym in a temple there, and they hired someone of the preschool background to run it and did the same idea.
Joe went and got a story in a local paper, big story in a local paper. Basically it filled up, and she was running it almost like a franchise. They expand to five or six locations, and at this point she buys out Max and she makes the people that are running these couple of locations partners. It’s 1976, and there’s nine locations in California. They’re making a little bit of money. Joan decides she’s going to get a license to open franchise. Here’s the thing, she didn’t get any legal advice on setting any of this stuff up. She tries to trademark Kindergym, and she’s running this for a couple of years as a franchise until she discovers you can’t franchise Kindergym. It’s too generic a name-
Dave Young:
Oh, because kindergarten, kinder…
Stephen Semple:
But she’s already got these franchises isn’t been operating under the name Kindergym. They’re trying to think of different names, trying to think of different names. One day, one of the names sticks. Her husband even calls and the says, “Gymboree, Gymboree, Gymboree.” What a great name, Gymboree. They decide to set it up as Gymboree, and she decides to do it right this time. She goes out and gets some advice, a guy by the name of Bud Jacob, who has experience in franchising, likes the idea, likes her, and decides to help her out.
It’s 1982 and they need to raise some money, and Bud introduces her to Stuart Muldaw, who invests. Now at this point, they’re still renting church halls. This is how they’re doing it. They’re going and renting church halls. It’s no leases, none of this other stuff. It’s handshake agreements. He invests $300,000 into the business for 30%. Here’s what they’re looking for. They’re looking for women that were just like Joan when she started this. They’re looking for women in their late 20s, early 30s who are raising families but wanted to do something, wanted to do something more, wanted to bring some extra income into the household. Their strategy is they’ll create a PR strategy in every community that they’re thinking about going to, so just replicating the idea.
Again, remember Joe knows how to create this because of her husband, and also was very successful. But here’s another idea that they created. They also did advertorials in the Wall Street Journal. For those who don’t know what advertorials are, their advertisements that look like an editorial.
Dave Young:
Yeah, you write your own news report, news story, and then pay to have it placed in the paper.
Stephen Semple:
Right, and this speaks to how well she understands influencers. Because what she was looking at when she created these advertorials, they were not written to the women. They were written to the husbands. The whole idea is the father would read this article in the Wall Street Journal, this advertorial, and think to themselves, “This would be perfect for my wife,” which is really interesting because so many people would want to target the buyer instead of targeting the influencer.
Dave Young:
We call it indirect targeting. You write an ad that’s ostensibly an employment ad for your company. But when you talk about the kind of people you want to hire, you’re really talking to every consumer out there saying, “No, this is the kind of people that we are.”
I love that, I love that.
Stephen Semple:
But today, so few people think that way. It’s all about target, got a target. But here she was purposely targeting the influencer, targeting the father who would read it, this be perfect for my wife.
Now, here’s one of the things they were really picky on. Fit was one of the biggest things. If they didn’t think there was a good fit, they didn’t offer the person the franchise, and they focused on the East Coast. At this point, they’re focusing because they didn’t need help on the West Coast. LA was exploding. A lot of the people that they had focusing in on already understood press and media because they were actors on the side and all this other stuff. The West Coast was growing organically, so they were focusing these advertorials and whatnot on the East Coast.
Here’s how much it was growing. By 1986, they have 400 centers. They’re doing 15 million in sales in 400 centers. But here’s where the problem happened.
Audio:
Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.
[Using Stories To Sell Ad]
Dave Young:
Let’s pick up our story where we left off. Trust me, you haven’t missed a thing.
Stephen Semple:
Here’s how much it was growing. By 1986, they have 400 centers. They’re doing 15 million in sales in 400 centers. But here’s where the problem happened. Joan realized the franchising model was flawed. It was never going to work. The franchisees could not pay enough money to pay for the support that head office was providing because they were all like these really tiny businesses. They felt like they couldn’t charge much more because there was competitors popping up because it didn’t cost a lot to get these things started. They couldn’t reduce the service they were supporting.
Here’s this business, 400 units, all looking great. It’s being mentioned in press and all this other stuff. But the business side is failing, so they needed to figure out another way to make money because the investors needed to get repaid, right? They thought, “Hey, maybe here’s what we could do. Maybe we do licensing because everybody knows the Gymboree name.”
Dave Young:
Merch. Merch.
Stephen Semple:
Yeah, so they go out and they get a whole pile of great licenses. But guess what? After about a year, almost all of them dropped them because the products didn’t sell.
Hasbro then looks at doing an acquisition event, so they think, “Okay, great.” It felt like a bailout for Joan and a lifeline. Literally, they’re at the stage. Joan and her lawyer and the senior management team have flown to New York to sign the deal with Hasbro. She’s in the hotel and she gets a telephone call from one of the VPs of Hasbro who says the deal’s off.
Dave Young:
The deal’s off. Just like that?
Stephen Semple:
Just like that. Her team is there, the investors are there, her lawyer’s there, and they’re supposed to meet the next day, and the deal is off.
She’s devastated because she now has to go back and tell everyone that this is off. She’s so completely spent this point she says she’s got to go for the weekend to her cabin in the Sierras. She basically looks at her team and says, “You got to think of another plan. You got to think of another plan. This franchising isn’t working. The Hasbro’s deal’s off. We need another plan.”
Guess what? what’s the unleveraged asset that they have, Dave?
Dave Young:
Well, their name. I mean, we’ve got all these kids in there.
Stephen Semple:
Yeah, so she comes back because they have this great brand, but they have a business that can’t make money. She comes back and sitting on her desk is a sketch of a play center right next to a retail store.
Dave Young:
There you go.
Stephen Semple:
Actually, what they end up doing was putting the play center at the back of the store.
Dave Young:
Sure.
Stephen Semple:
What’s the asset that they have? Moms coming in to drop their kids off, parents coming in to drop their kids off. And what are they going to do when their kids are playing?
Dave Young:
Walk clear through the store.
Stephen Semple:
Clear through the store. It’s like having the gift shop at the back of the museum. When you leave the museum, you got to walk through the gift shop.
Dave Young:
It’s the milk and eggs back in the back of the grocery store.
Stephen Semple:
Exactly, unleveraged asset. And so here’s what they decide to do. They’re going to sell their own apparel, sell, play equipment, toys, all that stuff. They’re going to do as much as they can, where they’re going to brand it all themselves. Basically you got to walk through the gift shop, and the gift shop is what’s going to make the money. The play center is the draw that brings people in.
They went back to the board to ask for money to invest, and they agree to do a test store. That then for a whole bunch of reasons, ends up becoming two test stores. One of the things that freaked Joan out at the time was one of the people on the board was very close to the folks at Gap. She gets a meeting with Gap, and Gap says to them, “We love the idea so much. We’re launching Gap Kids in a few months.”
Dave Young:
Oh, great. Thank you, we’re stealing the idea.
Stephen Semple:
It was one that was so far along she’d even say it wasn’t that because they were like, “Literally, we’re opening in four months Gap Kids.”
Dave Young:
They already were watching and saw that this paying attention to little kids can pay off.
Stephen Semple:
Yeah. But anyway, they launched in 1987. I want you to go back to 1987 because in 1987, malls were really big, and getting into a mall… You couldn’t just get into a mall. Malls had to approve you. They were very picky, right? Now, it’s still that way for really high-end luxury malls today. But you couldn’t just pick up the phone and say, “Hey, I wanted to open in a mall.”
But what Joan was able to do is the Gymboree name was so well-known she was able to leverage the name. She was able to leverage the idea that parents will be coming in, dropping their kids off, and wandering around. She got into a couple of really great malls, and here’s what ended up happening. That Christmas, her two locations were the highest dollar per square foot sales in the entire mall.
Dave Young:
In the mall? Okay.
Stephen Semple:
So that huge success, huge success. Based upon that success, she was able to go out and raise $6 million to expand the business. 17 years later, Bain comes along and buys the business for $1.8 billion and then bankrupts eight, seven years later.
Dave Young:
I wonder how much of the equity she still owned.
Stephen Semple:
I don’t know because one of the things that happened-
Dave Young:
I mean, she sold that 30% chunk and that early guy… I hope she did well.
Stephen Semple:
One of the things is she did well, but she was completely uninvolved with the company by the time Bain bought the company, she recognized when it was growing that it was beyond her abilities. But she also had some real health issues with some eating disorders and things along that lines, and so there was a certain point after the raise of $6 million and they were doing the really rapid expansion that she actually left the company. She had a whole pile of health issues that she went, “You know what? I’ve got to deal with all of this. I actually need to step back and step away from the business.”
I didn’t want to explore all of that. What I wanted to explore was the success that she had of building this business and this whole idea of… To me, it was really interesting. You and I often talk on this podcast, what are the unleveraged assets of the business? They had it there in front of them, and they were forced to look for it when all of a sudden it was, this franchise model cannot make money. They explored every possible way, and there was no way for it to make money. The sale falls through and suddenly it’s like, well, what do we do? The unleveraged asset was we have all these people coming to our locations. We have all these kids-
Dave Young:
All we got to do is find a location that wants this traffic.
Stephen Semple:
Yeah, all these kids are coming.
Dave Young:
They’ll want us if they want the traffic.
Stephen Semple:
Right? It’s like the whole movie theater. Again, when movie theaters were much bigger than they are today, you would have a mall where you put a movie theater. And then that would attract all sorts of restaurants around it because the movie theater brings people to the location.
The anchor tenant back in the day. We had the anchor tenant in the mall. That brought people to the mall. They had that asset there and were not leveraging it.
Dave Young:
I mean, to have that designation of the highest dollars per square foot in the mall, that was before at Apple Stores, but she held that position for a bit, right? That’s pretty cool.
Stephen Semple:
Yeah, and it was all from, okay, we’ve got these people coming in. It’s no easy task, no easy task. People coming in, we should sell them stuff. They love Gymboree, so let’s sell them branded Gymboree apparel, branded Gymboree toys, and all that other…
Dave Young:
And the brand just doesn’t exist anymore? They bankrupted it and…
Stephen Semple:
Still a few around. I think there’s a company that now that’s trying to revive it and things along that line. I didn’t look too far after the whole Bain thing was like-
Dave Young:
Yeah, in my mind I’m thinking, okay, well, she did all this before social media, too. That’s pretty amazing.
Stephen Semple:
But what she leveraged was and what she knew was how to create PR.
Dave Young:
Yeah, I love videos of kids falling off playground equipment for some reason. Or there’s one where you’ve probably seen the meme of the perfect job doesn’t exist. Oh wait, it’s a guy on a skating rink throwing a big ball at kids and knocking them over. I’m like, “Okay, yeah, sign me up.”
Well, that’s a cool story. There’s several reasons I didn’t really know much about it. I was born at the wrong time when she was up and running big. I was a young guy in his 20s without any kids living in a town that didn’t have a mall and blissfully unaware of all the things that were affecting us. But what a cool story, and good for her for building it up and making a nice, big, juicy exit.
Stephen Semple:
When I heard it just jumped out at me just because of it being such a good example of an unleveraged asset that they were forced to find because of all these other challenges. That’s often the thing that we’re doing when we’re going and visiting businesses is that whole, what are the assets? Is it a story? Is it thing? Is it-
Dave Young:
Oh, absolutely. It’s fun. To me, that’s the fun of the one-day sessions that we do, which is you start pulling at threads looking for those. They don’t even realize it, but that’s really what you’re looking for. What do you have that we can leverage in a good way that people just don’t understand that you do or that you have or where you are or who you are? Those kinds of things.
Stephen Semple:
They didn’t realize they had it until they were forced to look for it.
Dave Young:
Great fun.
Well, is there a Gymboree for old men? I should probably go.
Stephen Semple:
There’s a business opportunity.
Dave Young:
We just go in and play around on equipment. Not serious weightlifting, but you’d get some work in.
Stephen Semple:
There you are.
Dave Young:
I can, probably. Thank you for bringing the Gymboree story.
Stephen Semple:
All right, thanks, David.
Dave Young:
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